How do I change Magento logo

The option value is a relative path to image from skin/frontend/<theme_package>/<theme_name>/ directory, where <theme_package> should be replaced with your theme package and <theme_name> should be replaced with your theme name. For example, for default Magento theme images/logo.gif is expanded to skin/frontend/base/default/images/logo.gif file on filesystem. If you are using default package and grayscale Magento theme, the path will be expanded to skin/frontend/default/grayscale/images/logo.gif.

Instead of overwritting default logo file shipped with the theme it is recommended to upload a new file, (mylogo.gif or mylogo.jpg for example) into corresponding skin/frontend/<theme_package>/<theme_name>/images directory and change the Logo Image Src option accordingly. It should prevent overwritting of your logo with default one in case of future theme upgrade or Magento upgrade.